A More Expensive Alternative To Gas [& How To Profit From It]

The Miami Herald reports that

Washington has embraced an alternative to $3-a-gallon gasoline -- $4-a-gallon ethanol.

That's the cost of this federally mandated fuel additive, when you take everything into account. Ethanol, produced mostly from Midwestern corn, currently wholesales for more than $3 a gallon.

And that's the Midwest price -- ethanol costs even more on the coasts because it can't be sent through pipelines and thus is costlier to ship than gasoline. At these prices, adding even small amounts of ethanol to gas can boost pump prices by 20 cents per gallon or more.

In addition, the Department of Energy reports, ''ethanol has only about two-thirds the energy content of an equivalent volume of gasoline,'' so it substantially reduces fuel economy. In effect, using it is like switching to a larger vehicle. In many big cities, ethanol cannot be added to ordinary gas without the resulting mixture violating federal air-quality regulations. It has to be added to a costly base blend that compensates for ethanol's environmental shortcomings.

When you add up all the direct and indirect costs of using ethanol, it's the equivalent of $4-a-gallon gasoline -- and closer to $5 if you consider its lousy fuel economy.

Give the feds credit. It isn't easy to find something worse for consumers than $3 gas, but they managed to do it.

Of course, ethanol isn't really designed to help America's hard-pressed drivers, but to help special interests -- namely, Midwestern corn farmers and ethanol producers such as Archer Daniels Midland. For years, the domestic ethanol industry, aided by its supporters in Congress, has enjoyed massive tax breaks as well as protectionist tariffs that block cheaper imports. And now, thanks to last year's big energy bill, Americans are required by law to add four billion gallons of ethanol to the fuel supply this year. That number will rise to 7.5 billion gallons by 2012.

Substituting ethanol for gas is a terrible idea. It will just raise the price of corn and cause a food shortage in the long run.

I think a good short term play is buying options for next summers corn futures. Prices are bound to jump in the next 6-8 months.

Speaking of investing, one company I recently invested in Anglo-American [AAUK] is up nearly 10% in the 10 days I've owned it! Its made up for the losses I incurred in RNE. AAUK owns a large part of De Beers, the Diamond company. That should keep my wife happy. She gives me the evil eye everytime they play those anniversary ring ads plays on TV.

AAUK is a good hedge against the dollar and raising commodity prices. [or basically a hedge against inflation!]